Thursday, October 10, 2013

Yes, Krugman Has Been Wrong About Economics, Too

Niall Fergusson takes Krugman to task for his assertion that he has been right about everything since 2007, with the only two mistakes that he admits being things that predate that year, namely underestimating the effects of IT on productivity during the 1990s, and overestimating the problems caused by Bush's deficit increasing policies.

Fergusson points out that Krugman has been wrong about things after 2007 as well, most notably repeatedly predicting the breakup of the euro area, indeed often saying that the euro will disappear completely Unlike the interpretation of economic tatistics, this is not an error which can be disputed: there is no doubt that the predicted destruction/breakup hasn't happened. Not only do the euro still exists, no country, not even Greece, has exited and some countries, including Slovakia, Estonia and soon also Latvia (January 1, 2014) has in fact entered it. So, there is no way that Krugman can really being wrong about that.

Krugman's response to this is that he was still right about the economics, that countries that tries to impose austerity without being able or willing to counteract it with ”monetary stimulus” suffers deep slumps, but that he underestimated the political will of Southern European countries to endure economic suffering to stay in the euro.

But no, he hasn't been right about the economics, either. While it is clearly true that Southern Europe in general and Greece in particular has suffered an economic slump after trying to reduce their deficits, that reflects structural and cultural failings of these countries.

Lots of countries have implemented austerity and despite lacking an independent monetary policy or being at the zero bound while not suffering a slump. That includes the U.S. who implemented the so-called ”fiscal cliff” that Krugman claimed would cause a slump almost entirely (with all the spending cuts of the so-called sequester and most of the tax increases implemented as well). But also the Baltic states and Ireland which implemented austerity without devakuing and saw their economy recover.

Regarding Latvia, Krugman called it in 2008 ”The New Argentina” and will inevitably collapse. But that clearly didn't happen as Latvia has successfully stabilized its public finances while avoiding devaluation and recovering strongly from its slump.

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